Lecture by David Swenson to Robert Shiller's Financial Markets class where Swenson explains why he feels the 60/40 model is broken for endowments and other portfolios with an unlimited time horizon.

FYI: Copy & Paste 7/26/14: Lawrence C. Strauss; Barron's
Tiny gain in first half follows years of annual losses for hedge funds and mutual funds in this sector.
Regards,
Ted
Many hedge funds specializing in managed futures have struggled with poor performance, to put it mildly.
After shining during the financial meltdown of 2008 -- the HFR index tracking these funds returned an impressive 18.06%, versus a 37% loss for the Standard & Poor's 500 that year -- these funds have fallen on hard times. On average, they lost 3.54% in 2011, followed by negative performances of 2.51% and 0.87% in 2012 and 2013, respectively.
As a result of this persistent underperformance, net outflows surged to nearly $6 billion in the first half of 2014, according to HFR. "Financial advisors are having a hard time persuading their clients to stay with it," says the manager of a large fund of funds.
MANAGED-FUTURES FUNDS' ASSETS total about $230 billion, or roughly 8% of the $2.8 trillion invested in hedge funds, according to HFR. The good news is that there are small signs of an improving environment for these funds, which tend to be helped by more volatility and a macro environment in which there's a lot of divergence among asset prices. The unwinding of the Federal Reserve's quantitative-easing program should help. In the first half, the average return for managed-futures funds was 0.37%. That's not great, but it's better than it has been in the recent past.
These funds rely heavily on futures contracts, usually to make calls on the direction of stocks, bonds, currencies, or commodities. Often with the help of computer algorithms, managers try to identify trends -- whether it's rising interest rates or declining gold prices. AQR Funds describes it in a recent shareholder letter as going long markets whose prices are rising and shorting those with falling prices.
For managers who can correctly identify trends ahead of the pack, so much the better when it comes to performance. Especially good scenarios are when markets are going from good to very good or from bad to worse, as was the case in 2008. Later that year, stocks and commodities tanked, while gold and Treasuries rallied. All of which led to a stellar performance that these funds haven't come close to repeating.
One of the trend-following strategy's selling points is that it's a good way to diversify a portfolio, thanks in part to low correlations to traditional assets like stocks and bonds. But with equities doing so well in recent years, many of these funds have been passed by. However, Pat Welton, co-founder of Welton Investment, which runs managed-futures strategies, points out that many of these managers don't take large positions in equities because "it's exactly what you've been hired to diversify away from." In addition, when markets flatten out -- as has been the case with interest rates, for example -- it's harder for managers to find trends and exploit them.
Yao Hua Ooi, a portfolio manager of the $6.2 billion AQR Managed Futures Strategy fund (ticker: AQMNX), points to "how far you look back to determine whether a market is trending up or down" as a key factor. In the past few years, managers who use longer time horizons -- say at least a year -- have fared better than those who use a shorter window, typically one to three months, he observes. The AQR fund's managers blend shorter and longer time horizons to gauge trends, he adds.
As if to illustrate how challenged performance has been for these funds, AQR Managed Futures Strategy has a three-year annual return of 1.2%, placing it near the top of its Morningstar category. It's a mutual fund, not a hedge fund, with an expense ratio of 1.50% -- pricey for a mutual fund but considerably cheaper than a typical hedge fund.
Welton attributes these funds' performance difficulties to the flood of liquidity by central banks around the world, more or less in unison for many years. Low interest rates have been accompanied by lower spreads, making it hard to find good trends to follow, he adds.
AN 18.73% RETURN in 2010 for the Welton Global Directional Portfolio was followed by three straight years of negative results, triggering outflows. In this year's first half, however, the fund was up 17.41%, having made money in equities, commodities, interest rates, and currencies. The portfolio also had success with so-called relative value strategies, an example of which would be going short one basket of stocks, while being long another.
Several firms have studied the dismal performance of managed futures. Ooi, of AQR, contributed to a paper on that topic. With the help of financial simulations -- these funds weren't around in, say, the 1920s -- the paper concluded that "trend-following has delivered strong positive returns and realized a low correlation to traditional asset classes each decade for more than a century." Adds Ooi: "Just like any investment strategy, it has had underperformance, but that isn't predictive that the strategy will no longer generate returns going forward."
Most of managed-futures funds, however, are in crying need of a sustained stretch of good performance -- and sooner rather than later.
M* Snapshot Of Managed Futures Fund Returns: http://news.morningstar.com/fund-category-returns/managed-futures/$FOCA$13.aspx

FYI: Copy & Paste 7/26/14: Jason Zweig: WSJ;
Regards,
Ted
Even a "fiduciary" investment adviser may still be able to treat clients in ways that might surprise you.
Someone who owes you a fiduciary duty must put your benefit ahead of his own; in practice, that should mean minimizing fees, eliminating all avoidable conflicts of interest and fully disclosing any other material conflicts. Unlike brokers—who need only ensure that their recommendations are "suitable," given your needs and circumstances—investment advisers are already required by law to meet that standard.
Even so, many advisers impose "termination fees" on clients who leave the firm within a set period. It is appropriate for an adviser to recoup the cost of setting up and administering your account—and perhaps even to deter you from bolting the first time the market dips a little. But securities lawyers say that termination fees should be directly related to those costs. Otherwise such fees would seem to violate the spirit, if not the letter, of fiduciary duty.
"If for any reason you don't trust your adviser anymore, or you don't like his performance, then terminating the contract is your only real way to protect your interest," says Robert Plaze, a partner at law firm Stroock & Stroock & Lavan in Washington who formerly regulated investment advisers at the Securities and Exchange Commission. "You shouldn't be penalized for doing that."
Termination fees are fairly common. In its latest annual brochure, filed with the SEC in May, Horter Investment Management, a financial-advisory firm based in Cincinnati, says that it charges clients $200 if they exit some of the firm's strategies within 90 days. That is in addition to management fees that run up to 2.75% annually.
The firm manages approximately $700 million, according to another form filed with the SEC. Drew Horter, head of the firm, was traveling this past week and no one else was authorized to comment, said an employee.
The David J. Yvars Group, an investment-advisory firm in Valhalla, N.Y., says in its SEC brochure, filed in April, that "if an account terminates within one year of opening, a 1% termination fee will apply."
A client with $1 million would thus pay $10,000 to leave Yvars Group within the first year, in addition to the firm's management fees, which run at a 2.6% annual rate for a stock-oriented account of that size.
Yvars manages approximately $100 million, according to the brochure. David J. Yvars Sr., chief executive of the firm, didn't respond to several requests for comment.
Regulators have taken the position in the past "that some termination fees may violate an investment adviser's fiduciary duty," says David Tittsworth, president of the Investment Advisers Association, a trade group in Washington. Such fees, he says, may be unfair if they "penalize a client just for terminating an adviser or keep a client from ending a bad advisory relationship."
Other experts caution that the law in this area is ambiguous. The SEC, says Mr. Plaze, "should either enforce this or change the rules." A person familiar with the SEC's thinking says that the agency views each such situation based on the facts and circumstances.
Brian Hamburger, president of MarketCounsel, a consulting firm in Englewood, N.J., that helps investment advisers comply with financial regulations, says advisers are increasingly insisting that clients give them 30 to 90 days of advance notice of a termination.
In some cases, that might enable advisers to unwind complex or illiquid securities without hastily depressing their prices. But often, says Mr. Hamburger, it simply enables advisers to keep earning fees from clients who have already said they don't even want to work with them anymore.
So bear in mind that the word "fiduciary" isn't a guarantee that an adviser will put you first.
If an adviser's brochure says you could owe a termination fee, ask why he feels, as a fiduciary, that such a charge is in your best interest.
"Clients often make the argument that a termination fee is inconsistent with how an adviser should operate," says Barry Barbash, a partner at law firm Willkie Farr & Gallagher in New York and former head of investment-management regulation at the SEC. "They say it makes them uncomfortable, so they'd like to see it struck from the contract."
Finally, bear in mind that most advisers don't charge termination fees at all, and many will even refund a portion of your fees if you decide to leave the firm. So think twice before you hire someone who will charge you to fire him.

FYI: Copy & Paste 7/23/14: Jason Zweig: WSJ;
Regards,
Ted
include a tribute to the late Peter L. Bernstein. Few things have given me greater professional and personal pleasure than having been able to call Peter my friend.
Peter, who died five years ago at the age of 90, spent nearly six decades on Wall Street. He also worked at the Federal Reserve, taught economics at Williams College, toiled as a commercial banker, ran an investment-counseling firm, and consulted on economics and investing strategy with some of the world’s largest money managers. He was the founding editor of the Journal of Portfolio Management, which took as its mission to make investing as close to a science as the theory and the data would permit. He wrote nearly 20 books, including the twin masterpieces Capital Ideas, his history of how modern financial theory transformed investing, and Against the Gods, probably the best popular book ever written on risk.
Like most people who knew him, I regarded Peter as the philosopher-king of Wall Street, the man who had read everything, knew everyone, and had thought longer and deeper about the hardest puzzles than anyone else.
Yet the central lesson that emerged from Peter’s life and work was intellectual humility, not hubris. The more he learned, the more skeptical he became of his—or anyone’s—ability to predict the future.
Insatiably curious, Peter never stopped learning, and his favorite word when confronted with something he hadn’t yet thought of was “Wow!”
I think of him as the modern equivalent of the sages described by the great French essayist Montaigne:
“To really learned men has happened what happens to ears of wheat: They rise high and lofty, heads erect and proud, as long as they are empty; but when they are full and swollen with grain in their ripeness, they begin to grow humble and lower their horns.”
Again and again, Peter would marvel that he could “make a living by reminding people of what they know only too well already.”
In 1999, I was thrilled when Peter asked me to write a guest essay for his newsletter. (To avoid any conflict of interest, he didn’t offer, nor did I request, any compensation for writing it.) For my topic, I chose the challenge that professional money managers faced in trying to take a long-term perspective in an increasingly short-term world.
We titled it “The Velocity of Learning and the Future of Active Management.” Fifteen years later, the topic seems at least as relevant (click here to download the PDF).
In 2004, I drove up to Peter’s summer house in Brattleboro, Vt., to do a long interview. We talked for nearly four hours about everything from John F. Kennedy (Peter’s classmate in the Harvard College class of 1940) and Peter’s experiences as an intelligence officer during the London blitz in World War II to the problems of 401(k)s and the puzzle of why companies pay dividends.
Together, he and his wife, Barbara, could be as wickedly funny as classic comedy teams like Burns and Allen or Stiller and Meara. Peter mentioned during that interview that he and his lifelong friend, the economist Robert Heilbroner, had done everything together as children and teenagers. “We even lost our virginity together, at the exact same moment,” he recalled. “Not at the exact same moment, Peter,” Barbara said.
You can click here for part one of my profile of him and here for part two; the PDFs are large files that could take a while to load, but any visit with Peter is worth the wait. A fuller transcript of our long conversation is available here.
Economics And Portfolio Strategy: http://green.lunarbreeze.com/~jason146/wp-content/uploads/2014/07/PLBjz.pdf
Peter's Uncertainty Principle Part 1. http://green.lunarbreeze.com/~jason146/wp-content/uploads/2014/07/11.04PBernstein1.pdf
Peter's Uncertainty Principle Part 2. : http://green.lunarbreeze.com/~jason146/wp-content/uploads/2014/07/11.04PBernstein2.pdf

In the event of a nasty credit crunch or related that is going to cause severe, negative economic dynamics; the final over-riding circumstance for any and all monies, be they in financial institutions such as banks, credit unions or money market type funds would the overriding mandates of presidentical directives; which would include any neccessary methods to limit and/or control cash flows as determined for the overall health of institutions and others as needed.

The following is an Associated Press news release quoted from the Washington Post.
(It is the second article down on the page.)
New SEC rules for money-market funds
"Regulators voted by a narrow margin to end a longtime staple of the investment industry — the fixed $1 share price for ­money-market mutual funds — at least for some money funds used by big investors.
The idea is to minimize the risk of a mass withdrawal from the funds during a financial panic.
The Securities and Exchange Commission also is letting all money funds block withdrawals when their assets fall below certain levels or impose fees for withdrawals.
The rules were adopted Wednesday by a 3-to-2 vote, culminating several years of regulatory haggling and false starts. They were opposed by one Democratic and one Republican commissioner.
The floating-price requirement applies only to prime institutional funds, which are considered riskier. They represent about a third of money-market funds, according to the SEC.
A run on a money-market fund during the financial crisis showed how risky the funds could be. The Lehman Brothers collapse in fall 2008 triggered the failure of the Reserve Primary Fund, one of the biggest money-market funds, which held Lehman debt. The Reserve Primary Fund lost so much money that it “broke the buck,” as its value fell to 97 cents a share."
— Associated Press

FYI: One area of the financial markets that we constantly monitor for signs of confirmation or divergence in the trend for equities are spreads between interest rates on high yield debt and comparable treasuries. High yield debt is far out on the risk spectrum of fixed income, so it tends to have a closer correlation to equities. Therefore, when stocks are rising, we typically see spreads on high yield debt tighten as investors have a bigger risk appetite. Conversely, when equities decline you see spreads on high yield debt normally widen as investors demand more in the way of yield to compensate for the added risk.
Regards,
Ted
http://www.bespokeinvest.com/thinkbig/2014/7/23/high-yield-spreads-widen-should-you-be-worried.html?printerFriendly=true

Meanwhile, I am subscribing to a newsletter (Chartist) for 10% of the total investment just to gain access to another datapoint.

Note that there is the Chartist Mutual Fund newsletter and the regular Chartist newsletter, which is an individual stock newsletter. The editor/author, Dan Sullivan, is a market timer.
Some on MFO have spoken very highly of James Stack, who publishes the InvesTech newsletter and apparently has a good performance record. I believe his newsletter is on the Hulbert Financial Digest Honor Roll.
If you want to get an objective third party audit of the performance records of many newsletters, the Hulbert Financial Digest does that. I believe you can also order an in-depth analysis of an individual newsletter from Hulbert.

A lot of dire forecasts for junk bonds in the various links of Ted original link above. Here's some more negative comments, these coming from Michael Aneiro's column in this week's Barron's. Mr. Aneiro has been a regular Cassandra on junk bonds for well over a year now. You know the broken clock analogy, so maybe Mr. Aneiro's time has finally arrived.
>>>Among current pockets of risk, as I've warned in this column before, is the corporate bond market. Not only are corporates rich, but they can also be harder to sell than they were just a few years ago. Since the financial crisis, banks have cut their corporate-bond holdings to keep pace with regulations. Inventory is down by 40% to 75%, according to various estimates, and if there's ever a rush to sell, fewer willing buyers could mean steeper losses, affecting bonds, mutual funds, and ETFs alike.
"THERE'S NO QUESTION that liquidity has decreased," says Gershon Distenfeld, director of high yield at AlianceBernstein, who says increased capital requirements have curtailed risk appetite among banks and dealers and made it more costly to maintain bond inventories. He adds that Bear Stearns, Lehman Brothers, and Merrill Lynch used to represent more than a third of U.S. high-yield trading volume, and none of them exist as a stand-alone entity today.
Fixed-income trading at banks "is evaporating," says James Swanson, chief investment strategist at MFS Investment Management. He sees corporate bonds, particularly high yield, as increasingly perilous for investors. "Are those markets, given how low yields are, compensating you for the risk of illiquidity?"
Corporate bonds are often pulled in two directions: When equity prices fell amid last week's turmoil, riskier corporates slid, too, but the losses were tempered by gains in underlying Treasury bonds. That pattern can hold up for short periods but will be challenged during more protracted downturns, especially if nobody really wants to buy.<<<

"How I became A Financial Predator and Spent My Summer Vacation."

Hi Bhopali. Be very careful in thinking anyone on a discussion board or anyone marketing an investment news letter is a guru. We are all here to offer opinions and listen to the ideas of others. Not to say there are not a lot of smart people on this board to help you form your own style - there are. But take in ideas to form your own style, which I kind of think you already have.
With that, my opinion would be to DCA the new money into a diversified portfolio based on your age and risk tolerance. This bull is long in the tooth, so putting all the $ to work now could be a mistake.
If you have an urge to follow a news letter, set aside maybe 10% of the money for that purpose. It might be fun to play the game, but don't risk a lot of money on a stranger.
If it is a substantial windfall, it might not be a bad idea to talk with a 'fee only' financial advisor. They should give you more of the detail catch22 referred to (important considerations). It could be just for a one-time assessment and plan outline with no further obligations. I actually found that this type of assessment and financial advice is offered free through some of the big investment houses like Schwab and Fidelity. I'm in the process of rolling over my 401k to an IRA at Charles Schwab. I went to my local branch to speak with an advisor there. I was very happy and impressed at the personalized retirement and investment overview I received - for free.
Bhopali, just my 2 cents with a grain of salt. Congratulations on your windfall and good luck on your plans.

FYI Morningstar Inc. said it will pay $61 million to settle an intellectual property lawsuit filed by a Chicago-based developer of financial software, according to a Securities and Exchange Commission filing.:
Regards,
Ted
http://www.chicagotribune.com/business/breaking/chi-morningstar-settlement-intellectual-property-20140717,0,4765214,print.story

Editor's Corner
Between Balance Sheet Growth and Reduction
Ron Rowland
Fed Chair Janet Yellen conducted her twice-annual testimony on monetary policy to the Senate and House yesterday and today. Her prepared speech contained little new and tended to emphasize previous Fed statements. “Too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed,” Ms. Yellen reiterated to the Senate Banking Committee.
The Fed recently announced its timetable of ending additions to its balance sheet by October, but little has been revealed about what happens after that. Today, she told the House Financial Services Committee that the Fed intends to reduce the size of its balance sheet eventually. When lawmakers pressed her on this subject, she stated the Fed would be in a position to provide guidance by the end of the year. In other words, they are still working on it.
With asset purchases almost complete and balance sheet reductions still on the drawing board, the attention is turning to when the Fed will start raising interest rates. Yellen believes that time is far in the future because the 6.1% unemployment rate is not telling the whole employment story and inflation is under control. One indicator she is keeping an eye on is wage increases, and so far, there has not been any pressure on employers to raise wages.
There appears to be some dissention within the Fed regarding interest rates. Some members think the time may be ripe to begin raising rates and are voicing their concerns. According to Kansas City Fed President Esther George, “Today’s economy, with a strengthening labor market and rising inflation is ready for a more normal rate environment. Waiting too long may allow certain risks to build, that if realized, could harm economic activity.”
Corporate taxes are becoming front-page news as more and more companies reincorporate overseas through inversions in order to receive more favorable tax treatment. An inversion is defined as “a transaction through which the corporate structure of a U.S.-based multinational group is altered so that a new foreign corporation, typically located in a low- or no-tax country, replaces the existing U.S. parent corporation as the parent of the corporate group.” The Obama administration is encouraging congress to take immediate action to pass legislation aimed at curtailing this activity. In an interview today, Treasury Secretary Jack Lew stated his preference that any such legislation be retroactive to prevent a last minute rush by corporations.
Investor Heat Map - 7/16/14
Sectors
Technology climbed another rung of the ladder to displace Energy at the top of the sector rankings. The stability of large cap stocks over the past week, coupled with an upside earnings surprise from Intel (INTC), helped Technology grab the lead. Energy didn’t drop far and is now in second place. Real Estate performed well and climbed two spots to third, pushing Health Care down to fourth in the process. Telecom weathered the recent market storm well and rose to fifth from eighth. There is now a three-way tie for sixth place as Materials, Financials, and Consumer Staples crowd together. Materials weakened enough to fall two spots and join the other two sectors despite a good earnings report from Alcoa (AA). The recent rise of Consumer Discretionary was partially unwound this week as it fell back three spots to ninth. A strong performance from the transportation industry helped Industrials move out of last place, while continued weakness for Utilities pushed it to the bottom.
Styles
The style rankings are now reflecting a full defensive mode pattern. Category strength is currently aligned by market capitalization, with the largest stocks on top. Within each capitalization strata, Value is the strongest and Growth the weakest. This is defined as a defensive pattern because during times of market uncertainty or weakness, investors favor the blue-chip large capitalization stocks over the more speculative small company equities. Additionally, stocks exhibiting Value characteristics are considered safer than those tilted toward Growth. The only two relative ranking changes from last week were the rise of Mega Cap from sixth to first and the fall of Mid Cap Value from first to fifth. Micro Cap remains at the bottom for a second week, and today it sports a negative momentum reading.
Global
Sometimes a category will jump in the rankings, and sometimes it may surge. Latin America went from ninth to first over the past week – easily qualifying as a surge. The region’s recent success is almost entirely due to improvements in Brazil, as Colombia and Argentina lost ground while Mexico and Chile lagged. China held its second place spot and today reported that its second quarter GDP grew by 7.5% from a year ago. Canada, in first place for the past two weeks, fell to a third place tie with Emerging Markets. Japan slipped two spots to fifth, and the U.S. eased down to sixth. World Equity, Pacific ex-Japan, and the U.K. were all pushed down a peg due to the rapid ascension of Latin America. EAFE and Europe bring up the rear, and Europe flipped over to a negative momentum reading.

Too bad MJG isn't here to read Munger's comments re academic financial types. Pretty funny.

FYI: The intriguing argument by Research Affiliates founder Robert Arnott is that conventional retirement investing gets things precisely backwards.
As Mike Foster of Financial News this week aptly sums it up, Arnott argues investors should own more stocks the older they grow, not fewer, which also means those approaching retirement should cut back their participation in the bond market. He finds that 40-year periods since 1871 generally show his approach yields a superior result — more on those findings in a moment.
Regards,
Ted
http://blogs.barrons.com/focusonfunds/2014/07/16/retirement-investing-are-you-doing-it-all-wrong/tab/print/

Actually he seemed relatively bullish with his comments.
"Birinyi expects the S&P 500 to keep advancing as bears capitulate and pick up stocks.
Durable, Sustainable
“This is a durable and sustainable bull market,” he said in a July 9 phone interview from Westport, Connecticut. “It’s going to surprise us because I still don’t think we’ve got to a point where water is boiling yet.”
Birinyi, one of the first analysts to advise clients to buy when stocks were bottoming after the 2008 financial crisis, predicts the S&P 500 will rise to 2,100 (SPX) by December."

FYI: dDoomsayers, the guys who believe that every breakthrough is one step closer to a turning point.
As a result, a raft of prognosticators has come out in the last few weeks saying to expect everything from a mild downturn (buying opportunity) to a reason to protect profits and move to cash to a looming decade of financial pain and misery.
It’s enough to get investors thinking about buying a bear-market fund
Regards,
Ted
http://www.marketwatch.com/story/think-twice-before-you-invest-in-a-bear-market-fund-2014-07-14/print?guid=AD8EC752-0B54-11E4-B65E-00212803FAD6
The Average Bear Market fund Returns YTD-One Year-Three Years Five Years:
YTD: -(9.77) %
1. -(26.02)%
3. -(23.72)%
5. -(28.30)%
M* Bear Market Fund Returns;
http://news.morningstar.com/fund-category-returns/bear-market/$FOCA$BM.aspx

Ah, yes, the Fidelity New Millenium Fund, another good example (and, apparently, getting better) of how a fund, given enough time, can "reconstruct itself" by erasing history and memories.
I remember giving this fund some consideration in the mid-00s. At the time, if I'm recalling correctly, the fund was characterized variously as a multi-cap growth fund, or as a mid-cap growth fund (in Fidelity's own quarterly reports), that would push the envelope wherever the manager felt the best growth opportunities could be found, even if that meant a higher turnover (which were, in fact, invariably high). I don't recall the specific word "aggressive" ever applied to it. Top 20-30 hldgs were always an eclectic bunch, so it held some interest for me; however, I could not determine with any comfort level from where its returns actually came, and I suspected quite a bit came from momentum-chasing and IPO pops, not so much from stock picking acumen. There also had been a recent manager change, and then the financial crisis swoon occurred, and so it fell off my consideration list.
Now curious that it is characterized as an aggressive LC growth fund, without any indication that it has ever been anything else. Looking at Fidelity's fund snapshot and FMILX equity style map:
https://fundresearch.fidelity.com/mutual-funds/composition/316200302
Voila! Historically, according to the map, it has never existed as a fund whose hldgs have ever been predominantly midcap-anything.
It looks like it has done very well, since 2009 (?), as a LC fund with an aggressive bent. And that may be where it remains, for----evah. But its 10 yr and since-inception stats are irrelevant to peer comparison, because back then it was not LC. It would be only the most diligent new investor, willing to get into the way-back machine, who would ever be able discover this fact about FMILX's long-term record.

FYI: Cope & Paste 7/11/14: Kristian Grind: WSJ:
Choices Including Nontraded Real-Estate Investment Trusts and 'Liquid Alternative' Funds Have Numerous Risks
Regards,
Ted
Mutual funds that try to emulate hedge funds. Exchange-traded funds that use borrowed money to jack up their bets. Real-estate investment trusts that are hard to unload. Structured notes that look like conventional debt but can be far more risky, and "go anywhere" bond funds that are prone to trade safety for yield.
All these investments have at least one thing in common: They have seen their popularity soar recently as investors seek protection from perceived market dangers—or as fund companies market them heavily. They also are hard to understand, lack transparency, are expensive and don't have proven performance records.
In interviews, financial advisers, analysts and industry experts frequently said these investment types should be treated with extra caution by investors.
"Anything that is complicated is not something that the typical investor should buy," says Samuel Lee, an analyst at Chicago-based investment-research firm Morningstar MORN +0.44% who specializes in ETFs. "There are more opportunities for sophisticated players to take advantage of you."
To be sure, these investments can perform well and could have a place in a portfolio—albeit a small one—as long as they are used correctly. There are plenty of other risky investments marketed to individuals that aren't named here—foreign-exchange trading or options trading, for example.
Investors should ask several questions before they plunk down their money, says Robert Hockett, president and wealth manager at Atlanta-based Cambridge Wealth Counsel, which oversees $260 million in assets: Is it clear what the investment does? Does it come with high fees? Can you sell it easily? And does it have a proven record?
Here is what you need to know about the five investments—and some safer alternatives.
Liquid-Alternative Funds
"Liquid alternative" mutual funds typically employ hedge-fund-like strategies but don't come with the same restrictions. There isn't a high investment minimum, for example, and the funds aren't as difficult to exit as traditional hedge funds.
The category encompasses several different subsets, including so-called long-short funds—equity funds that hold long positions in some stocks while betting against others, and managed-futures funds, which bet on futures contracts. Other funds use leverage, or borrowed money, to ramp up their bets.
Liquid-alternative funds have skyrocketed in popularity, with investors pouring $40 billion into them in 2013, up from $14 billion the previous year, according to Morningstar. This year through June, they have taken in $14.6 billion.
Fund companies say they offer investors a chance to diversify their portfolio and capture at least some of the upside of stock returns in good markets while offering protection in down markets.
But skeptics say the strategies often are too complicated for the average investor to understand, and many are too new to have a proven track record. They also come with high fees: an average of 1.9% of total assets, or $190 per a $10,000 investment, compared with 1.2% for a typical actively managed stock mutual fund and 0.6% for a stock index fund, according to Morningstar.
"They have some ugly baggage and warts they carry," says Mark Balasa of Balasa Dinverno Foltz in Itasca, Ill., a wealth-management firm with $2.8 billion in assets under management. "Advisers are challenged to understand what they do, let alone investors."
Christopher Van Slyke, founder of WorthPointe, a wealth adviser in Austin, Texas, with $325 million of assets under management, says most of the funds he has seen pitched by investment firms don't have more than a six-month track record. He likens them to a "black box" because of their complex investment strategies.
Try instead: If you want some shelter from the risk of a bad decline in stocks, you could always keep more of your money in cash instead. It is safer and a lot cheaper.
Nontraded Real-Estate Investment Trusts
Nontraded real-estate investment trusts are similar to their public counterparts, which trade like stocks and allow investors to invest in an array of commercial properties.
Lately, nontraded REITs have been going gangbusters: In 2013, they raised $19.6 billion, up from $10.3 billion in 2012, according to Robert A. Stanger & Co., a Shrewsbury, N.J.-based investment bank that tracks the industry. Through June of this year, nontraded REITs have raised $8.8 billion.
Investors are attracted to them because of their high dividends—generally as much as 7% on invested capital versus 3% to 4% for publicly traded REITs, according to Green Street Advisors, a research firm in Newport Beach, Calif.
But nontraded REITs can be hard for investors to unload during a real-estate downturn, advisers say. The investments have become a concern of the Financial Industry Regulatory Authority, the industry's self-regulator. Because they are generally illiquid, their performance and value are difficult to understand and the cost is high, the agency has warned.
Disclosure is murkier than with publicly traded REITs. While nontraded REITs report their holdings quarterly, investors don't initially know more than the general asset class they are investing in when they buy in—what is known as a "blind pool."
What's more, say experts, because the REIT isn't trading publicly, it is hard to gauge its value until a liquidity event occurs, such as when the REIT is sold, merged or publicly listed, although the REITs typically use appraisals to report the share value after the offering closes.
Fees also are high, as much as 11% in initial sales charges to pay the retail broker, the dealer and the back-end costs of putting the REIT together, according to Stanger.
Nontraded REITs have a mixed track record. Of seven deals that were merged or sold in 2013, four are worth more now than the initial issuing price of the shares, according to Stanger. A $10 share in the Chambers Street REIT, for example, would now be worth $8.04, while a $10 investment in the Cole REIT would be worth $13.56.
Try instead: Publicly traded REITs aren't nearly as risky and are far more transparent, and they can be a good diversifier in a portfolio, experts say. A mutual fund that holds a basket of commercial real-estate companies also can provide exposure to the market and is liquid, says Dave Homan of Willow Creek Wealth Management in Sebastopol, Calif.
The $24 billion Vanguard REIT ETF, VNQ +0.01% for example, whose holdings include property developers and REITs, has returned an average of 10.5% over the past three years as of July 10, according to Morningstar. The ETF has an annual expense ratio of 0.1%, or $10 per $10,000 invested.
Graphic; http://online.wsj.com/news/interactive/INVESTOR0711?ref=SB10001424052702304642804580015090303169012

Hi Guys,
Sorry for the confusion, but this is my fourth workaround attempt to post. My patience is running thin.
As you know, I am skeptical of all forecasts. My overarching feeling is that forecasting is at best educated guesstimates with a low likelihood of prescience. Forecasters basically can not forecast. I contributed to this topic more as a fun submittal than as an actionable forecast.
The big danger in all these forecasts is the possibility of investor overreaction to unknowable Black Swan world events. Such overreactions destroy forecasts and happen frequently. But the marketplace has demonstrated strong recovery resilience.
I really like Charles Ellis' observation that “Time is Archimedes’ lever in investing”
Unfortunately, as John Maynard Keynes noted: “The market can stay irrational longer than you can stay solvent”. So don’t fall into that trap; keep a healthy cash reserve. I use the Vanguard short term corporate bond fund as my reserve unit.
I just discovered yet another meaningful financial axiom. This one is from Warren Buffett: “The difference between successful people and very successful people is that very successful people say “no” to almost everything”. My takeaway is to be judicious when seeking and accepting advice. Don’t be satisfied with unsupported assertions; check and verify the references and the statistics.
My patience is exhausted so I’ll stop here. Plenty of personal opinions are embedded in all these postings, but that’s what makes a vibrant marketplace. Enough serious talk committed to a supposedly fun exercise.
I’ll say Good-By for now. I’ve enjoyed most of our exchanges. I look forward to talking with you all further down the road.
Best Regards and Best Wishes.